This article addresses the consequences of “transfers at death” of qualified small business stock (“QSBS”) under Section 1202.

Generally, in order to qualify for Section 1202’s gain exclusion, the stockholder who sells QSBS must be the same stockholder who was issued the QSBS by the qualified small business corporation. There are several exceptions to this requirement, including Section 1202(h)(2)(B), which provides that when there is a transfer “at death,” the transferee is treated as the original stockholder for Section 1202 purposes and is treated as having held the transferred QSBS for the original stockholder’s holding period.

This is one in a series of articles and blogs addressing planning issues relating to qualified small business stock (QSBS) and the workings of Sections 1202 and 1045 of the Internal Revenue Code.[i] During the past several years, there has been an increase in the use of C corporations as the start-up entity of choice. Much of this interest can be attributed to the reduction in the corporate rate from 35% to 21%, but savvy founders and investors have also focused on qualifying for Section 1202’s generous gain exclusion. Any future increases in capital gains rates may result in QSBS eligible investments being even more attractive by comparison.[ii]

What does transferred at death mean?
“At death” is not defined for Section 1202 purposes or in any other tax authority expressly interpreting Section 1202.
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